ECO3203 Quiz 8-10
A higher savings rate result in a:
temporarily faster growth.
Q8: Country A has the production function: 𝑌=𝐹(𝐾,𝐿)=𝐾^0.5𝐿^0.5 Does this production function have constant returns to scale (CRS)? What is the per‑worker production function, 𝑦=𝑓(𝑘)?
The production function has CRS, and the per-worker production function is 𝑘^0.5
From a macroeconomic theory perspective, what is unusual about the Covid-19 recession?
There was a shift in the economy's potential output.
Which economist predicted that humanity's long-run prospect is poverty?
Thomas Malthus
In the steady state in the Solow model, which is NOT one of the uses of new capital?
To replace capital exported to other countries
For macroeconomists, what distinguishes the short run and the long run?
Whether prices are sticky or flexible
Country A has the production function: 𝑌=𝐹(𝐾,𝐿)=𝐾^0.5𝐿^0.5 Assume that neither country experiences population growth or technological progress and that 5% of capital depreciates each year. Assume further that country A saves 10% of output each year. Find the steady-state level of capital per worker (𝑘∗), income per worker (𝑦∗), and consumption per worker (𝑐∗) for each country. Also, remember to express the percentages in decimal terms.
k*=4; y*=2; c*=1.8
If the marginal product of capital is greater than the depreciation rate, then:
increases in the capital-labor ratio will increase output by more than the required increase in depreciation, so consumption also increases.
What happens in an economy that has more capital than the Golden Rule level?
Decreasing the capital stock to the Golden Rule level benefits both current and future generations.
If an economy has y=4, k=16 and a depreciation rate of 5%, what is the savings rate in this economy?
s=0.2
In the Solow model, which two variables have similar effects on the capital stock per worker?
Depreciation and population growth
Which indicates that firms are NOT engaging in TOO MUCH research activity?
The positive 'standing on shoulders' externality is greater than the negative 'stepping on toes' externality.
What is the expected result of a decrease in the velocity of money in the long run?
The price level will fall and output will not change.
What might Joseph Schumpeter have called the rise of online retailing at the expense of brick-and-mortar retail outlets?
Creative destruction
What happens in an economy that has less capital than the Golden Rule level?
Current generations must sacrifice to maximize future consumption.
How do the Solow growth model and endogenous growth model view the marginal product of capital?
The Solow model assumes diminishing returns, and the endogenous growth model assumes constant returns to capital.
How do the long-run predictions of the Solow growth model and endogenous growth model compare?
The Solow model predicts an eventual steady-state equilibrium, and the endogenous growth model allows for continued growth.
Assuming that labor and technology are fixed, why is there a limit to capital accumulation?
More capital means more capital must be replaced.
If population grows at rate n and workers become more effective at rate g, which variable grows at rate n + g ?
Output
According to Okun's law, how would real GDP change if the unemployment rate rose by 2 percent?
Real GDP would fall by 1 percent.
How does the economy move from a short-run equilibrium to its long-run equilibrium?
Shifts occur in the short-run aggregate supply curve.
Why do the short-run and long-run aggregate supply curves have different slopes?
Sticky prices
A decrease in the saving rate leads to:
lower output in the long run
Which is NOT part of the index of leading economic indicators?
The M2 money supply
Country A has the production function: 𝑌=𝐹(𝐾,𝐿)=𝐾^0.5𝐿^0.5. Assume that neither country experiences population growth or technological progress and that 5% of capital depreciates each year. Assume further that country A saves 10% of output each year. Suppose that country A start off with a capital stock per worker of 2. What are the levels of income per worker and consumption per worker?
y=1.4; c=1.27
Which of the following production functions has constant returns to scale?
𝑌=𝐾+𝐿
Which is a valid description of the aggregate demand curve?
It tells us the possible combinations of the price level and output for a given money supply.
In the Solow model with population growth and static technology, what is the Golden Rule condition?
That the difference between the marginal product of capital and the depreciation rate equals the population growth.
The Golden Rule level of capital maximizes:
consumption
In the basic Solow model, at the Golden Rule steady state, the marginal product of capital equals
the depreciation rate.
If the production function of an economy is 𝑦=𝑘^0.5, what is the steady state level of capital stock for an economy with a savings rate of 0.4 and a depreciation rate of 0.2?
4
An economy without population growth or technological progress has the production function 𝑦=20𝑘^0.5. The current capital stock is 100, the depreciation rate is 10%. For income per person to grow, what rate must the saving rate exceed?
5
Q10: What criterion does the NBER's Business Cycle Dating Committee use to determine when the economy goes into recession?
A variety of data and its professional judgement
Q9: In the Solow growth model, which variable is endogenous?
The capital stock
Which of these growth facts is TRUE?
The evidence is mixed on whether the disparity in income is increasing or decreasing over time.
When does the classical dichotomy NOT hold?
When not all prices are flexible
According to the Solow model, if an economy increases its saving rate, then in the new steady state, compared with the old one, the marginal product of capital will be: HINT: think about what happens with the MPK when k increase.
lower
The steady-state consumption is the gap between:
output and depreciation